Up until a couple of years ago, I was a complete failure as a stock investor. If there was a mistake in judgment as the result of impatience, greed, or ignorance, I had made it. But if you’ve read some of my other posts, you’ll learn that by starting to receive excellent advice not only on great companies to invest in but also the idea of buying and holding them for the long term, my fortunes have turned around considerably in a short time and so can yours. [UPDATE 2020: Things are still going very well! Buy-and-hold works!]
In learning how to become a better investor, I’ve come to an understanding of the nature of the stock market. Just as an electrician needs to understand the nature of electricity to help him know how to properly work with it plus avoid getting harmed, an investor needs to understand the nature of the stock market to help him know how to make proper investing decisions plus reduce the chances of getting harmed.
By coming to this understanding, I have much greater confidence in how and when to do things plus what to do and what not to do when the market is being, well … the market!
The stock market is an ocean
To give you a better understanding of the nature of the stock market so that you can more confidently make decisions as an investor, I’m going to describe it according to how I understand it. I’m going to use the analogy of the market as being an ocean. On that ocean are tens of thousands of ships of all shapes and sizes, each one representing a company that’s listed on one of the world’s several stock exchanges.
Some of those ships get easily tossed by the waves whereas others can weather even the toughest of storms. Some of the crews are top-notch whereas many can’t ever seem to find their way to the land of opportunity.
Because I’m writing from North America, the biggest “ports” along our stock-market ocean are found in New York and Toronto. Other international “ports” include London and Tokyo. By purchasing shares in a stock, it’s as though a person is bringing some of their money on board one of these companies, trusting that the people running the ship are going to upgrade it as the company’s fortunes increase and make smart decisions about avoiding troubled waters in order to get the ship safely to the land of opportunity.
The great thing about these ships is that a person can bring even a little money onto one of them and still enjoy the full benefits of owning a part of that ship. There is no distinction between color, race, class, or socio-economic status. You aren’t stuck in the baggage hold even though you may only own a few shares. You can walk the deck and enjoy the journey just like everybody else on board.
Another great thing is that you can divide and bring your money onto several ships. The smartest investors will do this in case one or a few of the ships gets damaged or sinks during a storm. They will also do this because each ship will be in a different part of the ocean, and not all parts of the ocean typically have a storm at the same time.
The ocean has waves
However, if there’s one thing about an ocean, it’s rarely calm. There’s always some sort of wave motion that will cause all of the ships to bob up and down. So one thing to know about the stock market is that your typical stock will gain or lose 1-2% per day. On some days the water can be a little rougher, with some stocks gaining or losing several percent.
Often, this behavior is enough to drive the amateur passenger crazy. They’re so focused on the everyday ups-and-downs that they start to get seasick and fail to see the fact that they may be on a good ship that is still making its way toward the land of opportunity. To use landlubber’s idiom, they can’t see the forest for the trees. Maybe they were told there was going to be smooth sailing and a quick journey, and so they get disturbed by the choppiness and the captain’s report that the land of opportunity will probably take a long time to get to. Perhaps several months, often many years.
So instead of looking at the bigger picture – instead of buying and then holding for the long term – they decide to take their money and bail into the lifeboat, thereby missing out on what could have been if they only held on and weathered the storms. They didn’t understand that ups and downs are a fact of life on the ocean, and that the land of opportunity often isn’t just a short trip across the channel.
The ocean has storms
Every several years, there’s a combination of factors that come together to create the perfect storm. The storm is extremely violent and all the ships on all the oceans get tossed around. The smaller ones capsize or get dashed on the rocks. The largest ones lumber up one side of the gigantic waves and down the other, sustaining some damage but not enough to sink them. Their captains are wise with much experience, and so they rarely capsize or get dashed on the rocks.
About a year or so after the storm is gone, the larger ships complete their repairs and resume their journey to the land of opportunity, some of them even farther along than they were before, and they are joined by a bunch of new, small ships eager to go where they’re going. Some will find their way, many will not.
The biggest ship on the ocean right now is the S.S. Apple. It is also the most elegant and has sailed to the land of opportunity many times. The passengers who’ve benefitted the most are those who’ve stayed on the longest. Some bailed out after the original captain passed away a few years ago. Others bailed out before and since because they thought some of the competing ships offered better opportunity or safety. But those who’ve stayed on the longest are the most satisfied, and there’s no sign that it will slow down any time soon. In fact, the upgrades to that ship have been so numerous that it cuts through the ocean smoothly and swiftly, and its crew and new captain are top-notch.
Another ship on the stock-market ocean is the S.S. Berkshire-Hathaway. The two captains of this massive ship have multiplied the wealth of their earliest passengers thousands of times over the past few decades – well, those who stayed on the ship, that is. It is so large and stable that seasickness is rarely an issue, even during the most violent of storms. And so many of it’s satisfied passengers remain on board, watching their wealth grow year after year.
The ocean has victims
However, along the coastlines and along the bottom of this ocean are not only the wrecks of ships – small and large – but also the shattered dreams of many passengers. Some of the ships were just too small, and they wrecked easily during the storms. Others had crews who lacked clear direction and so they hit the coast or got swallowed up by the forces of the ocean. A few were attacked by pirates, suffered a mutiny, or were the victims of internal corruption on the part of a few of the crew members.
Some of the passengers bailed into a lifeboat, only to ask to get picked up by a ship that looked alluring at first and made nice promises but eventually also suffered one of the above-mentioned fates. Others float listlessly in their lifeboats, clinging to their money, untrusting and afraid of what might happen if they get onto another ship, afraid that what happened before might happen again. And so they float around while ships of opportunity pass them by, cursing the waves and the storms and the ships for their misfortune.
They blame what they don’t understand. They didn’t understand the nature of what they were getting into, and so they’re paralyzed by fear or they continue to make costly mistakes. They were so allured by the land of opportunity that they not only didn’t take the time to learn about the nature of the ocean, but they didn’t take the time to research which ships were the most likely to get them there and which ships to avoid.
I hope that this description of my understanding of the nature of the stock market has taken away some of the fear or mystery you’ve had about it. May this understanding help you more confidently make decisions as an investor so that you can benefit from the amazing opportunities that the stock market provides.
If you’re a brand-new stock investor – or still thinking about it – then I highly recommend the free e-book, Should You Consider Stock Investing? It could become one of the most beneficial 30-minute reads of your life.
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To new beginnings!